Fulcrum Security
The security in the capital structure where the enterprise value "runs out" — the class that is partially recovered and typically converts into ownership of the reorganised company. Identifying the fulcrum is the core of distressed investing.
Why Fulcrum Security matters in interviews
The fulcrum security is the central concept in restructuring and distressed investing, and it is the question that separates candidates who have read about restructuring from those who understand it. Identifying it correctly is the whole job in a distressed situation.
How it works in practice
The fulcrum security is the most senior piece of the capital structure that does not get paid in full in a restructuring — the layer where value "breaks". Everything above it recovers par; everything below it is typically wiped out.
Because holders of the fulcrum receive equity in the reorganised company in exchange for their claim, they end up owning the business. Distressed funds buy the fulcrum precisely to convert debt into control — the loan-to-own strategy.
A worked case: a company with $500m senior secured, $300m senior unsecured and $200m subordinated debt is valued at $650m in a restructuring. The senior secured recovers its full $500m. The remaining $150m goes to the senior unsecured, which recovers 50 cents. The senior unsecured is the fulcrum; the subordinated debt and the existing equity get nothing.
What candidates get wrong
- Assuming the fulcrum is always a specific tranche. It moves with enterprise value — if the business is worth more, the fulcrum sits lower in the structure.
- Ignoring structural subordination and where in the corporate group each claim sits. Debt at an operating subsidiary ranks ahead of debt at the holding company against that subsidiary's assets.
- Forgetting that the analysis depends entirely on the enterprise value estimate, which is exactly what everyone in the negotiation is arguing about.
Fulcrum Security: frequently asked questions
How do you identify the fulcrum security?
Estimate the restructured enterprise value, then apply it down the capital structure in order of seniority. The tranche at which the value runs out — fully recovered above it, nothing below it — is the fulcrum. Because it turns on the valuation, identifying it is genuinely contested in any real restructuring.
Why do distressed funds want to own the fulcrum security?
Because the fulcrum typically converts into the equity of the reorganised company. Buying it at a discount to par and converting to equity is the loan-to-own strategy: you acquire control of the business for less than the cost of buying it outright, and capture the upside of the recovery.
Go deeper
This term comes up constantly in restructuring interviews and on the desk.
Investment Banking interview prepRelated Restructuring terms
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